Blue Label Telecoms Integrated Annual Report 2017

BLUE LABEL

INTEGRATED ANNUAL REPORT 2017

Independent auditor’s

report to the

shareholders of Blue Label Telecoms Limited

continued

Key audit matters

Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the

consolidated and separate financial statements of the current period. These matters were addressed in the context of our

audit of the consolidated and separate financial statements as a whole, and in forming our opinion thereon, and we do not

provide a separate opinion on these matters.

The key audit matters below relate to the consolidated financial statements. We have determined that there are no key audit

matters in respect of the separate financial statements to describe in our audit report.

Key audit matter

How our audit addressed the key audit matter

Impairment assessment of goodwill arising from

business combinations and impairment assessment of

investment in Blue Label Mexico S.A. de C.V. (BLM)

Due to the number of business combinations that the

Group enters into, the Group’s net assets include a

significant amount of goodwill.

Goodwill comprises 7% of the total consolidated assets in

the consolidated statement of financial position. These

assets have been recognised in the consolidated statement

of financial position as a consequence of the acquisitive

nature of the Group.

Goodwill is tested annually for impairment or whenever

there is an impairment indicator identified by management.

This annual impairment test was a matter of most

significance to our audit because management’s assessment

process is complex and highly judgemental and is based on

assumptions, specifically the terminal growth rate, discount

rate and forecast cash flows, which are affected by

expected future market or economic conditions, particularly

those in South Africa. The balance of R604.6 million as at

31 May 2017 is material to the financial statements.

For the year ended 31 May 2017 management performed

an impairment assessment over the goodwill balance as

follows:

Assessing the recoverable amount as being value-in-use,

as entities are held for trading and not for sale;

Calculating the value-in-use for each cash generating

unit (CGU) using a discounted cash flow model; and

Performing a sensitivity analysis over the value in use

calculations, by varying the assumptions used (growth

rates, terminal growth rate and WACC i.e. discount rate)

to assess the impact on the valuations.

Refer to note 2.1 for details of management’s impairment

test and assumptions

Under IFRS, the Group is required to test the recoverable

amount of investments for impairment if there is an

indicator of impairment.

This impairment test was significant to our audit because

BLM reported a loss of R77.8 million for the year. The BLM

investment balance of R173.7 million includes a goodwill

balance of R120.1 million as of 31 May 2017.

Management’s assessment process is consistent with the

process followed for goodwill as described above. The

process is complex and highly judgemental and is based on

assumptions, including the terminal growth rate, discount

rate and forecast cash flows, which are affected by

expected future market or economic conditions, particularly

those in Mexico.

Refer to note 2.1 for details of management’s impairment

test and assumptions.

We made use of our internal valuations expertise to assess

whether the approach adopted by management in the

valuation models for both goodwill and the investment in BLM

is in line with market practice and the applicable requirements

of International Accounting Standard (IAS) 36 –

Impairment of

Assets

. We also tested the mathematical accuracy of the

valuation models through performing a recalculation.

We assessed management’s cash flow forecasts and agreed

them to the latest BLT Group Board approved budgets

which is subject to oversight by the subsidiary directors. We

held discussions with management regarding the process

by which the budgets were developed and to understand

the basis for the assumptions used.

The Board approved budgets cover a period of five years

and the forecasts for the purpose of the value-in-use

calculations extend out to five years.

We made use of our valuations expertise to independently

calculate a discount rate taking into account independently

obtained data such as the cost of debt, risk free rates in the

market, market risk premiums, country risk premium,

specific risk premium, debt/equity ratios as well as the beta

of comparable companies. This was compared to the

discount rate used by management.

We found the discount rate used by management to be

within an acceptable range of our independent calculations.

The terminal growth rate was compared to forecast

industry trends and to management’s past forecast history

for similar operations.

We also assessed whether assumptions, such as working

capital and capital expenditure, had been determined and

applied consistently across the CGU’s.

We performed independent sensitivity calculations on the

impairment assessments, to determine the degree by which

the key assumptions needed to change in order to trigger

an impairment. We discussed these with management and

based on the evidence obtained we accepted

management’s conclusion that the key assumptions applied

in the models were reasonable.

As a final test we compared the Group’s net assets as at

31 May 2017 of R5 billion to its market capitalisation of

R10.5 billion and noted that the R5.5 billion of implied

headroom was consistent with the results of our testing.